It’s been over two weeks since the Fed announced their first rate cut in more than four years. If you’re hoping this would lead to lower mortgage rates, you might be wondering: why are rates still creeping up?
Since March 2022, the Fed has been steadily increasing rates. What started at a humble 0.25-0.50% shot up to a 22-year high of 5.25-5.50% in 2023. For many, buying a home became a distant dream as affordability vanished. So, when the September Fed meeting rolled around, people were hopeful that some relief was coming. Spoiler: they did lower rates! The target rate dropped by 0.5%, settling at 4.75-5.00%.
You’d think this would be the green light to start house hunting, right? But when you hop on your favorite lender’s site, what do you see? Mortgage rates… are still rising. So, what gives?
Here’s the deal:
As the economy began to recover in the latter half of the year, many banks and lenders were already banking on the Fed lowering rates. This anticipation was baked into the rates they were offering. For example, just look at the data from Mortgage News Daily. Mortgage rates dropped from 7.41% in early May to 6.11% by mid-September—a solid 1.3% dip in just four months.
But now, after the actual rate cut, things are shifting. The optimism that we’d see even lower rates by year-end is starting to fade. Why? Because the economy is proving to be stronger than expected. A Labor Department report from October 4th revealed that employers added 254,000 jobs in September (way more than expected), and unemployment dipped to 4.1% from 4.2%. This unexpected boost in the economy has made lenders cautious, and as a result, mortgage rates are ticking up again.
You can see in the chart below, right after the rate cut the mortgage rate started going back up and getting at high as 6.53% on Friday.
Now, instead of another big cut, traders are thinking the Fed might only shave off another 0.25% by the end of the year and that caused the lenders to rethink their cuts and start taking rates the other way.
Summary: Why are mortgage rates rising after a Fed rate cut? In the anticipation of the fed’s rate drop the lenders had already been reducing rates over few months. Mortgage rates are climbing despite the Fed’s cut due to strong job growth and lender caution, with experts predicting only a slight reduction in rates by year-end.
